Goldman Sees Iron Ore Rout in 2015 as Supply Growth Quickens

Aug. 6 (Bloomberg) -- Iron ore will extend a drop through
2015 when an increase in seaborne supply that’s spurred a global
glut is set to accelerate, said Goldman Sachs Group Inc.

While the expansion in supply will probably moderate in the
second half of 2014, the trend rate of growth in seaborne
cargoes exceeds demand by a ratio of three to one, the bank said
in a report dated today. Goldman kept its forecast for the
steelmaking raw material at an average of $80 a metric ton in
2015 from $106 this year.

Prices have tumbled 29 percent in 2014 as companies from
Rio Tinto Group to BHP Billiton Ltd. increased output, betting
higher volumes will more than offset falling prices. Deutsche
Bank AG and Morgan Stanley see lower rates through 2016.
Fortescue Metals Group Ltd. has said it’s completed a $9.2
billion expansion to boost annual output to 155 million tons.

“The shift to oversupply started barely six months ago and
the adjustment phase is far from over,” said Goldman analysts
Christian Lelong and Amber Cai. “Seaborne supply is set to
accelerate again in 2015 while Chinese steel production growth
slows further.”

Ore with 62 percent content delivered to Tianjin increased
0.4 percent to $95.90 a dry ton today, according to data from
The Steel Index Ltd. Prices entered a bear market in March and
dropped to $89 on June 16, the lowest level since September
2012. China buys 67 percent of global seaborne supply.

Labor Dispute

While mining companies plan to boost shipments, a labor
dispute over leave and wages threatens to disrupt cargoes at
Australia’s Port Hedland, the world’s largest bulk terminal.
Tugboat engineers intend to strike for four hours each on Aug.
9, Aug. 11 and Aug. 13, says Teekay Shipping (Australia) Pty,
which is contracted by BHP Billiton Ltd. to tow vessels.

The action would mean that “half of the day’s shipping is
lost,” Ian Roper, a Singapore-based analyst at CLSA Ltd., said
by phone, estimating the strike would disrupt about 2.2 million
tons of supply. “That’s not a great amount. Fundamental wise,
there’s still an awful lot of supply.”

Fortescue and BHP estimate such a disruption may cost users
about $93 million a day. Port Hedland shipments made up 55
percent of Australia’s total ore exports last year and about a
quarter of global seaborne trade, Bloomberg calculations based
on Bureau of Resources and Energy Economics data show. Iron ore
is the country’s biggest export earner.

High Tide

Given the short duration of the stoppages and the glut, the
strike will probably not materially impact the seaborne market
or prices, Morgan Stanley said in a report today. If conducted
at high tide, each four-hour stoppage could affect as much as
500,000 tons, or 1.5 percent of monthly volumes, analysts
including Joel Crane said.

The outlook from Goldman contrasts with the view from
Westpac Banking Corp.’s senior economist Justin Smirk, who said
prices will rally and peak at $123 in the second quarter.

“We are likely to see softer near-term growth in ore
supply overall as Chinese and other sources of ore moderate
production,” Smirk wrote in a report today. “Any near-term
upside surprise in demand will be a positive for prices.”

Iron ore rose in July for a second straight month on
speculation that China’s demand for imports was improving,
helping to absorb a global surplus as local supplies in the
largest buyer are displaced.

Sanford C. Bernstein Ltd. predicted a dramatic recovery in
prices in second half, saying that it’s now cheaper for steel
mills in China to buy seaborne supply rather than domestic
material. Citigroup Inc. said in June prices will rebound as the
daily closure of mines supplying high-cost output in China
boosts demand for seaborne shipments.